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LNZ
Level 1

Sold a rental property inherited from an Exemption Trust

My parents had a rental property and a trust.  Dad passed in 2002 and the property received a stepped up basis.  The property was part of an exemption trust from 2002 to 2015 and all rental income and expenses were reported on the trust return.  In 2013 Mom passed.  The property did not get another stepped up basis because it already had one per our estate attorney.  A trust returned was filed for 2013 and 2014.  My brother and I inherited the rental 50/50 and began filing schedule E's on our own returns beginning Jan 2015 each taking 50% of the income/costs.  We sold the rental May 2019.

Is the depreciation recapture the amount from 2002 to the date of sale or from Jan, 01, 2015, when we each began claiming the rental? Any other input would be much appreciated.

1 Best answer

Accepted Solutions
MarilynG1
Expert Alumni

Sold a rental property inherited from an Exemption Trust

The Prior Depreciation amount would be calculated from the date you started renting the property. 

 

You will just use your stepped up basis of 2002 (FMV of property on date of inheritance) and this new basis will be used for depreciation. 

 

The basis of property inherited from a decedent is generally one of the following:

  • The fair market value (FMV) of the property on the date of the decedent's death.
  • The FMV of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation.

Click this link for info on how to enter the Sale of Rental Property.

 

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5 Replies
MarilynG1
Expert Alumni

Sold a rental property inherited from an Exemption Trust

The Prior Depreciation amount would be calculated from the date you started renting the property. 

 

You will just use your stepped up basis of 2002 (FMV of property on date of inheritance) and this new basis will be used for depreciation. 

 

The basis of property inherited from a decedent is generally one of the following:

  • The fair market value (FMV) of the property on the date of the decedent's death.
  • The FMV of the property on the alternate valuation date if the executor of the estate chooses to use the alternate valuation.

Click this link for info on how to enter the Sale of Rental Property.

 

**Say "Thanks" by clicking the thumb icon in a post
**Mark the post that answers your question by clicking on "Mark as Best Answer"
LNZ
Level 1

Sold a rental property inherited from an Exemption Trust

The Prior Depreciation is from when I started renting the property or when the property started to be rented?  I started renting it in 2015 but the Trust was renting it since 2002.  

DaveF1006
Expert Alumni

Sold a rental property inherited from an Exemption Trust

It is from the time you started renting it when you first inherited it.

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Carl
Level 15

Sold a rental property inherited from an Exemption Trust

All prior depreciation on the property ***BEFORE*** you inherited it, basically evaporates into thin air and just goes away. Yes, just like magic. Poof! Gone! That's because depreciation is based on *YOUR* cost basis, and that cost basis for *you* is the FMV of the property on the date the person *you* inherited it from, passed away.  However, your rental was not owned by a living breathing human before you got it. It was owned by a trust.

 I would expect you to get a step-up in basis when *YOU* inherited it. But when it comes to trusts, there are many different types of trusts and just as many ways each can be set up. Laws also differ on trusts among the states. I'm not at all knowledgeable on the trust thing which is why I recommend you go with what your attorney says about that.

But regardless, *YOUR* depreciation starts from the date *YOUR* name was placed on the ownership deed of the property, assuming the property has been classified as rental property for every single day your name has been on that deed.

Overall though, the four most powerful words you can say to your attorney is "show me in writing". Make sure it's a bonifide IRS document too, and not what some third party says (such as Cornell University, or TurboTax, or even me for that matter.)

 

tagteam
Level 15

Sold a rental property inherited from an Exemption Trust

@LNZ You need to consult a legal/tax professional who can actually read the trust document.

 

If the property received a stepped-up basis in 2002, the property was not included in your mother's gross estate when she passed (i.e., she was perhaps solely an trustee/income beneficiary), and the property was rented by the trust since 2002 (when your father passed), then the fair market value on the date of death of your father would be basis for depreciation.

 

If the property continued being a rental from 2002 until 2015 and then was distributed to you and your brother from the trust, you would typically take a carryover basis from the trust including prior depreciation deductions taken by the trust.

 

Again, a scenario such as the one presented calls for review by a professional who can inspect the relevant documents. However, the basis for depreciation would not necessarily be the date you "inherited" the property nor the date the names of you and your brother were placed on the deed (which would obviously affect the date from which you and your brother would be responsible in terms of depreciation "recapture").

 

Finally, the Legal Information Institute is a project funded by the Cornell Law School (Cornell University) and, among other things, they publish the Constitution, law (including the Internal Revenue Code), and federal regulations (including Treasury Regulations) all of which are legal authority and which the IRS must follow.

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